- Emerging markets face distinct crypto-asset challenges, including potential currency substitution.
- BIS report highlights cases like El Salvador and the role of crypto in bypassing capital controls.
Emerging Markets & Crypto: A Double-Edged Sword
The Bank for International Settlements (BIS), a global focal point in the financial ecosystem, has unveiled a comprehensive study focusing on the potential vulnerabilities and implications of crypto-assets in the fabric of emerging economies. While crypto’s influence has been widely discussed in various markets, the nuances specific to developing economies add layers of complexity to the conversation.
Currency Substitution: The El Salvador Paradigm
Emerging markets are uniquely positioned in the crypto conundrum. One paramount concern is the potential for crypto-assets to act as a substitute for local currencies. Various triggers, such as domestic currency devaluation, political instability, or other significant socio-economic events, could accelerate the transition to cryptocurrencies.
El Salvador, for instance, has been at the forefront of this shift. Mandating businesses to accept Bitcoin in 2021, by the following year, a substantial portion of its populace had engaged with the Chivo Wallet. However, the primary motivation for many was not a genuine inclination towards Bitcoin but rather the enticing $30 incentive. This dynamic saw the government’s $100 million Bitcoin investment halve in value. Another trend sees crypto exchanges offering cards to customers, enabling instantaneous crypto-to-fiat conversions during transactions.
Crypto’s Role in Evading Capital Controls
Emerging markets, often grappling with fragile domestic currencies, may implement capital controls to stave off capital flight. Cryptocurrencies, with their decentralized nature, make enforcing such controls arduous. Amplifying this concern is the pseudonymity of transactions in the crypto realm. Contrary to traditional bank accounts that demand rigorous identification, initiating a wallet for peer-to-peer crypto transactions is devoid of any such formalities.
Moreover, the efficiency of cryptocurrencies in remittances is undeniable. Seen as a swifter, cost-effective method for cross-border payments, the adoption curve for crypto in this avenue is steep.
Risks & Ramifications
Beyond the potential benefits, the BIS report accentuates several crypto-associated risks. These range from familiar concerns, such as fraud and investor vulnerabilities, to the centralization seen in exchanges, spawning market and liquidity threats. Credit risks arise from unchecked leverage, questionable transactions, and the absence of robust governance. From a technical vantage, blockchain technology introduces distinct cybersecurity challenges, especially around safeguarding smart contracts and wallets.
Lastly, the report delves deep into the cascading effects of these risks on the overarching financial infrastructure and proffers policy interventions. From outright crypto bans to calibrated regulations, these solutions mirror the suggestions from a prior BIS publication in January.